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David Stockman, former US Representative and
Director of the Office of Management and Budget under Reagan,
does not mince words. He sees the monetary systems of the world
coming apart.

How did we get here? He identifies the root cause as the
intentional over-leveraging of world economies by central
planners in a misguided effort to enjoy growth without
consequence.

I blame it on the Fed. I blame it on the 1971 decision by Nixon
to close the gold window and let the dollar float. Because out
of that has evolved — or morphed — a central banking policy in
the world that absorbs unlimited amounts of government debt.
And so we went on what I call the "T-bill standard" or the
"federal debt standard." And the other central banks of the
emerging mercantilist Asian economies — Japan, Korea, and now,
especially, the People’s Printing Press of China — have
absorbed this massive emission of debt that otherwise would’ve
created powerful negative consequences that would’ve forced
politicians to act long ago. In other words, higher interest
rates, pressure for inflationary monetary policy, and the
actual appearance of price inflation. But because all the bonds
on the margin were being absorbed by the central banks, we
got away for twenty or twenty five years with “deficits
without tears.”

And he's just getting started. The only thing more impressive
than Stockman's CV of insider roles in public economics and
private finance is his talent for colorful metaphor.

On The Fed

As far as I’m concerned, Bernanke is the monetary Darth
Vader. He has destroyed the bond market. Because
fundamentally, in a healthy capitalist system, the interest
rate in the money market and in the longer-term capital market
is the price of money and the price of capital. And if the
pricing system isn’t working, if it’s been totally crushed,
disabled, manipulated, rigged, medicated, everything that the
Fed has done with QE1, QE2, zero interest rates, Operation
Twist - all the rest of this insanity - then we’ve destroyed
the ability of the capital market to function and we’re giving
false signals in every direction.

On The Economy

We effectively had, over the last thirty years, a
national LBO - a leveraged buyout of the whole
economy. And this is important because if you look at the
difference between our historic leverage ratio [1.6 times debt
to GDP], which seemed to be compatible with a stable and
usually growing economy, notwithstanding periods, obviously, of
boom and bust. But at 1.6 times, we would have about $22
trillion of debt — public and private — on the US economy
today. We actually have $52 at 3.6 times. So the extra two
turns have put on the economy — households, business,
government, we can go through the different sectors — roughly
$30 trillion in debt that’s being lugged around by the US
economy as it struggles to stay even, to say nothing of
recovery today. And until that massive over-leveraging is
worked down and reduced and liquidated, which will take years
and years in a painful process, we’re not going to get back on
track as an economy.

On Our Political Leadership

It’s hard enough for politicians to face the music, to dispense
bad news, to make hard choices, allocate pain to constituencies
whether it’s spending cut or tax increase. But when the Fed
destroys the bond market, which is the benchmark for the whole
capital market, and tells the Congress that you can borrow
money for two years at eighteen basis points, which is — as far
as Washington’s concerned — that’s a rounding error. It’s the
same as free.

When you’re giving that kind of signal, then there is no
incentive, there’s no motivation for people to walk the plank
and face down this monster of a fiscal deficit and imbalance
that we have.

Washington thinks you can kick the can down the road,
the debt is more or less free, and we’ll get
around to solving the problem. But today, let’s not make any
tough choices. That’s where we are.

On the Banks

The banking system has been saved on the back of the
savers of the United States. We have totally destroyed
any incentive for thrift, for deferred gratification. The Fed
has become more Keynesian than Keynes.

Now, the fact is, if you were going to bail out the banking
system with this kind of transfer — I calculate it at $300 or
$400 billion a year — the suppression of interest rates on
depositors, on the $7 trillion or so of deposit base that we
have, is at least $300 or $400 billion a year. And that’s the
same thing as taxing the public by $300 or $400 billion and
redistributing it to banks based on the distribution of their
deposit base. That wouldn’t get one vote. Okay, in other
words, what I’m saying is if it were done in a proper way as a
fiscal transfer put before the democracy to review and vote up
or down, it would be voted down overwhelmingly. It would be
shouted down. It would not even see the light of day out of
committee, to say nothing of the floor of the House or Senate.

On Peak Oil

I think that is being totally ignored. It is
another one of the headwinds or constraints that we’re facing
along with the demographic time bomb of this huge generation
retiring. And if you look at all of these, there’s no reason to
expect much economic growth for the next ten or twenty years,
even if you had a healthy monetary and fiscal situation. But
given the situation that we’ve described and given the massive
excess private leverage that was built up in the thirty-year
debt spree, we have sort of added insult to injury. We have
maybe an inevitable question of the rising real cost of the BTU
being added to the demographic question being added to the
totally distorted world labor market that the central banks
have produced, which is another whole topic. But when you put
all those together, the headwinds are truly
frightening.

On Gold

Gold is becoming the de facto money.
We’re going to be back to a gold standard, one way or another,
through the back door in only a matter of time, simply because
the central banks are dominated by the ritual
incantation of dying Keynesian theory. And therefore,
I would say that’s what someone needs to do to protect
themselves.

The above are small samples from this wide-ranging and deeply
penetrating interview between Chris and David. Among other
territory, the two get into David's view of the stock, bond, and
commodity markets, and what action concerned individuals should
be considering at this time.

Click here to listen to Chris' interview with
David Stockman (runtime 47m:17s):